Are you in debt and feeling financially stretched? You are not the only one.
8.3 million people in the UK are struggling to pay off their debts, according to the National Audit Office (NAO). That is almost as many people as the whole London population (8.7 million - Office for National Statistics)
We all know that sinking feeling when you *think* you’ve been doing financially alright and then you get a text from your bank saying that you are about to hit your debit limit.
You’ve gone over your overdraft, again.
Your card was declined, again.
“We’re unable to process that direct debit.”
You’re going to face additional charges.
Even the most disciplined budgeter can fall into debt which shatters all the hard work you’ve put in to build a financially happy and secure future.
If you are sick and tired of debt and want to live in freedom, you’ve come to the right place.
In this article, we look at ways to get out of debt, so you can have a life you deserve.
We will explore the following areas:
- Why are so many people in debt?
- What is a debt to income ratio and why is it important?
- How to get rid of debt: the importance of refinancing
- Key takeaways: How to become better with money
Why Are so Many People in Debt?
There are countless reasons as to why someone could be in debt.
Debt can occur due to unforeseen circumstances like redundancy, divorce, moving to a new house, etc.
But most often, debt is a result of bad spending habits.
Below are some of the most common reasons people are in debt.
Living Beyond Your Means
A bigger salary would help us all out but often that's not the only thing ruining your budget—it’s living beyond your means.
Spending more than you earn sells your income to the future. Unless you have a plan and financial security to cover the cost and the interest for a set amount of years, your debt may accumulate more debt through interest.
The average UK salary is £35,423 for full-time work, which would give you around £2301.96 every month, after tax.
This may seem like enough, but if you don’t know exactly what’s going out of your account, it will be impossible to make your monthly wages stretch - let alone make a dent in your debts.
So it’s time to track your monthly income and your monthly outgoings and make sure it balances out.
Lack of an Emergency Fund
An emergency fund is a pot of money for any unforeseen financial emergencies. The purpose of an emergency fund is to stop yourself from getting into debt.
It’s best to save at least 10-20% of your monthly income and have 3-6 months’ worth of savings in your emergency fund.
Even £500 set aside can be a lifesaver if your car or a boiler breaks down.
Addicted to Impulse Buying
To some degree, we're all shopaholics. But there are some shopaholics that cannot get enough of buying things. They rely on it for their mental wellbeing.They are the victims of instant gratification.
Impulsive buyers associate material possessions with power, confidence, and happiness.
Sadly, impulse buying can lead to a series of dangerous spending behaviours like justifying unplanned poor buying decision, using credit cards for impulse purchases or losing track of your purchases.
While an impulse buy here or there may not leave a lasting impression on your finances, making it a habit can seriously deter from your financial goals.
Ultimately, there are people profiting from you remaining in a poor financial situation.
Short-term loans and credit cards offer a tempting solution. A quick fix for a quick problem. However, the high-interest rates and penalties make it almost impossible to clear easily.
According to The Money Charity, the average credit card interest rate in 2019 was 19.9%. If you only made the minimum payment per month, that credit card debt would take over 26 years to pay off in total.
Financial companies want you to merely make the minimum payment because they’ll profit off the interest you’ll be racking up during that time.
What Is a Debt to Income Ratio and Why Is It Important
The first the most important step to getting rid of credit card debt is to understand your debt to income ratio.
This number is used by lenders to assess affordability, so it’s a good guideline to figure out of your debt is out of balance with your income.
DTI = Total of monthly debt payments divided by Gross monthly income
To calculate your DTI, total up your monthly debt payments including credit cards, loans, and mortgage. Then divide that total by your monthly gross income. Finally, multiply the result by 100 to achieve your DTI percentage.
If you have a high percentage (hint: 36% is the highest you will be accepted for a mortgage) then you need to figure out how to reduce your debts or the interest to make your wages more manageable.
How to Get Rid of Debt: The Importance of Refinancing
Now that you know the most common reasons people get into debt, you are probably ready to take back control of your finances.
If you’re entirely overwhelmed with debt, something needs to change.
One of the most common debt consolidation option is refinancing.
Look at refinancing or debt consolidation as a strategy to pay less interest and eventually work towards getting rid of your debt.
Credit card consolidation is where you pay off all your credit card debts with one low-interest loan to pay less interest and lower your debt to income ratio.
Consolidating 2 maxed out credit cards which both have interest rates about 18% into one monthly payment at around 10% interest is going to cost you less in the long run. Use our free loan calculator to explore the best terms and rates you can get with a Leap peer-to-peer loan and get rid of that problem debt. behaviours you don’t think your debt is a problem and you’re managing payments, wouldn’t you rather pay less interest and get rid of it quicker?
Key Takeaways: How to Become Better with Money
The simple solution is to stop spending so much money.
But it easier said than done.
More future-oriented people are better at managing their money than people who seek instant gratification.
The reality is that the more impatient you are, the higher the price you will pay for everything as interest rates, monthly instalments etc all add up.
Ask yourself what you want your money to do for you this year, in 5 years and 10.
The key is making it specific.
What would happen if you put more money toward debt than buying those new shoes?
When you’re ready, set a date, and come up with a specific plan.
- Don’t say “No.” Instead say: “No, for right now.” Today’s ‘no’ is tomorrows ‘yes’. If you’re in debt because you’re not good with delaying gratification, this shift in thinking will help you.
- Start budgeting. Make sure your monthly income covers your outgoings.
- Build an emergency fund. Remember to save whilst you’re paying down your debt. It helps to build an emergency fund.
- Beware of payday loans. Pay-day loan companies make money off you not being in control of your finances.
- Try peer-to-peer loans. If your debt to income ratio is high, consider refinancing your debts with a peer to peer loan to pay less interest and get rid your debts quicker